How To Use Blockchain To Make Regulator Audits Easy
By Robin Massini

Nov 26, 2020

The Dusk Network is a privacy-enabled blockchain specifically designed for the compliant tokenization of securities. In this blog, we present a demonstration of auditability in a privacy-oriented network and how Provable Encryption (PE) plays an important role in this.

Companies and investors can benefit significantly from coupling securities with public blockchain technology. Actions such as voting or dividend payouts can be automated, restrictions and/or utility can be directly added to securities, and securities can also be fractionalized, opening up new investment opportunities to a wider public.

To capture these benefits, the blockchain needs to uphold various rights and obligations imposed by regulators. After all, the securities market is highly regulated to protect stakeholders. Tokenized securities are no different. If we want blockchain to reach its full potential and unlock the issuance, trading, and management of securities, it must enable companies utilizing blockchain to comply with the highest of regulatory requirements for privacy.

In essence, we have to solve the puzzle of transaction privacy and regulatory compliance on a public blockchain. And that is where Provable Encryption comes in.

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Everything you need to know about Provable Encryption

Provable Encryption allows for encrypted data to be verified without exposing the data itself. When data is encrypted, a zero-knowledge proof is generated and added to the transaction. This zero-knowledge proof proves that the correct encryption scheme was used. When the transaction is processed by the consensus participants, they can verify that the encryption scheme is correct, but without actually seeing the data. Simplified, it means we can verify what’s inside of a gift-wrapped package by confirming the gift wrap that was used.

Provable Encryption solves our privacy conundrum by providing the right tools to different stakeholders.

To exemplify this, let’s take a closer look at Alice, who initiates the transfer of 100 DUSK for 50 Acme tokens by executing the Acme XSC smart contract

  1. First, Alice’s transaction becomes obfuscated, meaning that the data remains confidential. Afterward, Provable Encryption is applied to generate a proof that verifies the correct application of the encryption scheme and the correctness of the transaction itself.

  2. With this proof of correctness, the Provisioners, who are consensus participants tasked with the validation of transactions to be added to the blockchain, can verify the proof. Note that they do not have access to the contents or details of the transaction. They do not know whose transaction it is, nor what the amounts involved are. In fact, to them, it is a completely anonymized transaction.

  3. This is different for the Acme corporation, or the issuing company. As an issuer, Acme needs an up-to-date registry of shareholders and Acme token transactions in order to achieve regulatory compliance. Through the use of a digital ‘master key’, Acme is able to view the details of all the transactions that have Provable Encryption and concern their token.

  4. Another important feature of the rights of the issuing company is that it can issue a ‘view key’ to auditors to grant them access to the digital registry. The auditor can then perform independent research to ensure that the registry is indeed correct, and all applicable regulations are followed.

In summary

  • Provable Encryption allows for the consensus to attest that the encryption is applied correctly, with the data remaining confidential.
  • It ensures the owner of the smart contract is the only one capable of seeing the entire transfer history, thereby meeting industry compliance standards.
  • It provides the owner of the smart contract with the possibility of easy reporting to the regulator, or auditors.


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